What is the Treasury Sub-Committee Inquiry examining in relation to greenwashing?

On 14 February 2023, the Treasury Sub-Committee on Financial Services Regulations (the Sub-Committee) opened an inquiry into ‘Greenwashing: sustainability disclosure requirements’ (Inquiry). The Sub-Committee is part of the Treasury Committee and its role is to scrutinise newly proposed draft financial services regulations which are open for consultation by the UK regulators.

The Inquiry follows the publication of the FCA’s proposals for Sustainability Disclosure Requirements (SDR) and investment labels set out in FCA Consultation Paper 22/20 (CP22/20) published on 25 October 2022 and discussed further in our earlier Engage article.  In CP22/20, the FCA proposes introducing criteria that a UK investment fund needs to meet before it can describe itself as ‘sustainable’, ‘ESG’, ‘green’ or similar. A key concern is that firms may be making exaggerated, misleading or unsubstantiated sustainability-related claims about their products that don’t stand up to closer scrutiny (so-called ‘greenwashing’). CP22/20 closed for comments on 25 January 2023 and the FCA is expected to finalise the SDR in a policy statement due by the end of H1 2023. The SDR and labelling rules are then expected to come into effect on 30 June 2024 subject to consultation feedback.

Background to the Inquiry

As background to the Inquiry, the Sub-Committee has published correspondence with the FCA which provides further detail on what is intended by the SDR and the potential impact of the rules on sustainable investment in the UK. On 20 December 2022, the Sub-Committee corresponded with the FCA asking specific questions about how the FCA intends to monitor and enforce the new SDR rules, whether the FCA has sought to balance the benefits of introducing the SDR against the potential risk of reducing consumer choice and how the FCA expects the net effect of the proposals will increase or reduce total sustainable investment in the UK.

The FCA’s response (9 January 2023) answers each of the Sub-Committee’s specific questions and argues that the proposals will increase consumer trust in ESG investments.  As set out in CP22/20, the FCA again emphasises that it is keen to address potential greenwashing concerns by adding a specific rule to the ESG Sourcebook to link the ‘clear, fair and not misleading’ principle directly to sustainability claims to give it an explicit rule against which it can challenge firms greenwashing products or services and take enforcement action against them as appropriate.  The letter also highlights that the FCA assumes that one third of UK funds currently claiming to offer sustainable products would not qualify, and another third would not apply to be regulated.

Commenting on the correspondence, Harriett Baldwin MP, Chair of the Sub-Committee, said:

“The FCA states that one third of investment funds wouldn’t qualify, one third wouldn’t apply for regulation under their new sustainability labelling proposals, and another third will qualify and apply. It isn’t clear what methodology the regulator has used to come to these suspiciously round figures, and if they have fully considered the consequences of their proposals for sustainable investing. That’s why we’ll be conducting further work in this area soon.”

What did the first Sub-Committee evidence session cover?

A first formal oral evidence session of the Sub-Committee was held on 22 February 2023 to gather witness evidence and views on greenwashing. The Inquiry is also considering whether tighter regulations could drive funds away from ESG investing, and how the proposals compare internationally.

The following witnesses gave evidence to the Inquiry:

• Sacha Sadan – Director of ESG at the FCA

• Mark Manning – Technical Specialist for Sustainable Finance and Stewardship at FCA

• James Alexander – Chief Executive at UK Sustainable Investment and Finance Association (UKSIF)

• Chris Cummings – Chief Executive at The Investment Association

• Kate Levick – Associate Director of Sustainable Finance at E3G

Chris Cummings of the Investment Association said although members support the FCA’s ambition to bring greater clarity to retail investors, he was keen to stress that the SDR requirements would mean that too few “sustainable” funds — up to 70 per cent — would meet the new criteria for labels, potentially leading to consumers feeling misled on existing investments that they initially understood to be green.  Concerns were also raised about the timing of the rules being put into effect within a year of the final policy statement meaning funds would have little time to make changes to meet the criteria.  Commenting on the criteria, the FCA stated that depending on feedback received as part of the consultation process, it may refine the proposed criteria for labels to allow more funds to meet the threshold. 

The Chair of the Sub-Committee questioned the FCA on whether it had analysed the possible costs to consumers of mis-sold ‘sustainable funds’. The FCA conceded that it had not carried out research into the potential cost implications for retail investors of its fund labelling proposals.  Given that the sector is fast evolving and a clear standard has not been available until now, the FCA clarified that funds that fail to meet the proposed labelling criteria would not necessarily have misled consumers. The FCA would use existing powers to take action if any unfair or misleading behaviours had taken place.

Next steps

At this stage, further evidence sessions have not been tabled for the Inquiry, but the Chair of the Sub-Committee indicated at the end of the hearing that she would be following up on various points with the FCA including potential costs for retail customers who had already invested in ‘sustainable’ funds and any enforcement action the FCA might take. We will continue to track developments in relation to the Inquiry and will report on any significant changes to the SDR and labelling proposals set out in CP22/20 as soon as we hear further.

Authored by Rita Hunter, Julia Cripps, and Melanie Johnson.